How does international financial integration affect national price levels? To analyze this question, this paper formulates a two-country open economy sticky-price model under either segmented or complete asset markets. It is shown that the effect of financial integration, i.e. moving from...

The canonical New Keynesian model specifies inflation as the present-value of future real marginal cost. This paper tests this New Keynesian Phillips Curve and exploits projections of future real marginal cost generated by VAR models to assess the model's ability to match the behavior of actual...